The Kelly Letter bought Dell at $29 two years ago. So far, we’re down 15%.
When we bought it, Dell was trading at a price 31% lower than it had been 11 months prior, and looked to have established a bottom at around $30. Since we bought it, the stock has traded in a rough range from $30 to $22. At Friday’s close of $24.54, it’s currently in the bottom third of that range.
Dell shares fell 13% on Friday, following the company’s 3Q earnings results. Profits were up, but by a penny less than expected and margins were down.
Michael Dell said that his company is enjoying “solid progress” in its turnaround. He said the firm expects to be a leading consumer brand, grow overseas, and make enterprise IT easier. He wants designs that create “product lust” the way Apple’s do.
There were several positives to help us feel good about holding shares. To me, the report was typical of a company still in turnaround mode, with nothing frightening at all.
The company will begin buying back stock next week, an excellent vote of confidence in its future. Costs continue coming down. Retail partnerships are growing, a necessary step to compete with HP. That combined with Dell’s plan to roll out compelling new designs should yield good results.
Michael Dell said in the conference call: “So with nearly 10,000 stores by year-end, we’ll soon be at about 27% of the top retail doors globally. It’s all about increasing a customer’s opportunity to see, feel, and experience Dell products.”
Also, notebook sales are roaring back to life. That segment is important because it’s the public face of a computer company. It’s where the logo is most often seen, the hardware that people notice in airports, and what shows up most frequently in movies, music videos, and other mainstream fare. It’s at the heart of the “it’s cool because cool people are using it because it’s cool” cycle that consumer goods depend upon.
Michael Dell said: “We’ll lead in the next generation of wireless, including WiMAX and 4G. We’re shortening our development cycles and bringing products to market 40% to 50% faster, and as I’ve already mentioned, fantastic reviews on our latest new notebook products. When placed side-by-side against our competitors, our notebooks are second to none in performance, design, quality and simplicity.”
I’ve long written that the vast majority of computer users have no idea what’s inside, or care anymore. As with a car, the exterior is more important than the engine. Any modern computer can get anybody’s work done these days, with the same keyboard, the same screen, and the same set of capabilities.
That leaves only price as a differentiating factor, right? That’s what many analysts contend. They say that computers are commodities and that selling commodities is a crummy business. It’s a losing proposition for all concerned because prices drop to rock bottom and every company loses.
However, introduce the concepts of branding and design and suddenly not all electronic goods are the same anymore. Ditto cars, whiskeys, and handbags. Any portable music player can play music, but you’d rather have an iPod. Any car will take you to the grocery store, but you’d rather show up in a Benz. Any whiskey tastes like whiskey, but you’d rather have Jack Daniel’s or Suntory Hibiki (in my neck of the woods, at least). Any purse will carry a wallet, but you’d rather have a Louis Vuitton.
I believe Dell is creating the next must-have line of consumer electronic goods, a category in which I place the computer. That’s the good news.
The bad news is that its turnaround is taking a lot longer than I expected, and I think solid results are still at least a year away. Between now and Dell’s “iPod moment,” there will be more disappointments like we saw on Friday.
Chief Financial Officer Donald J. Carty said as much in the conference call: “…we are going to continue to incur one-time costs as we restructure to improve productivity and execution, reduce headcount where appropriate, and invest in infrastructure and acquisitions. In addition, our near-term results could be adversely impacted by a slower decline in component costs than we saw earlier in the year and a seasonal shift in mix to U.S. consumer and international regions.”
The Kelly Letter will not look to double down on Dell anywhere over $24, and probably not until $20. I’m hoping for some disappointing results again that knock the price lower as those who don’t understand what Dell’s doing dump the shares.
This is a common technique in the letter. We often build positions in turnaround stocks and average down once or even several times as the price finds a bottom. Eventually, the price heads back up and, as Bill Miller says, “lowest average cost wins.”
While the letter is just watching Dell for the right time to buy more shares, we have an active order in place to buy shares of a company that’s down 30% since we first bought. The last time we bought more shares of a company that was down 30% from our initial buy price, it recovered dramatically and is now sitting on overall gains of +27%.
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